Treasury bill-bond interests fall on rising demand from banks

Highlights

• On 6 January, interest rates were 11.43% for 91-day, 11.80% for 182-day, and 11.95% for 364-day Treasury bills
• The central bank provided Tk22,500 crore in liquidity support to six banks in November
• While banks are now charging 12-14% interest on loans, loan demand has significantly decreased
• Investing in government Treasury bills and bonds is considered safer

Interest rates on Treasury bills, a short-term government borrowing tool, and Treasury bonds, a long-term borrowing tool, fell by 10 to 29 basis points due to increased demand from banks for these government securities.

According to data from the Bangladesh Bank, Tk4,000 crore was raised in Tuesday's auction for 5-year bonds. However, banks had offered around Tk18,000 crore at various interest rates. The bonds were sold at an interest rate of 12.09%. 

In the previous auction, the government had to pay an interest rate of 12.38%, meaning the interest rate on the 5-year bonds decreased by 29 basis points.

The central bank also stated that the government borrowed Tk3,500 crore in 91-day Treasury bills at an interest rate of 11.34%, Tk2,000 crore in 182-day Treasury bills at 11.68%, and Tk2,000 crore in 364-day Treasury bills at 11.81% through an auction last Monday.

In the last Treasury bill auction on 6 January, the interest rates were 11.43% for 91-day, 11.80% for 182-day, and 11.95% for 364-day Treasury bills. As a result, the interest rates on Treasury bills have decreased by up to 14 basis points in just one week.

A senior central bank official, speaking anonymously to The Business Standard, attributed the decline in Treasury bill interest rates to increased deposit growth and a significant decrease in credit demand, which has boosted liquidity in many strong banks. 

"Additionally, the central bank provided Tk22,500 crore in liquidity support to six banks in November by printing money, further increasing the money supply. As a result, banks are investing this surplus liquidity in Treasury bills and bonds," he added.

Another senior central bank official, noting the declining trend in the government's borrowing from the banking sector, said, "Banks had to close their accounts on 31 December last year, maintaining liquidity to demonstrate the health of their balance sheets."

"Now, it is time to deploy this liquidity. However, with loan demand low and limited investment opportunities, banks are channelling these funds into Treasury bills and bonds," he added.

The official also mentioned that had the interest rate remained the same, there would have been an opportunity to sell an additional Tk10,000 crore worth of bonds.

Senior bank officials said while banks are now charging 12-14% interest on loans, loan demand has significantly decreased, and banks are more cautious in lending. 

Additionally, banks must deposit a certain amount of CRR and SLR with the central bank when disbursing loans and are concerned about loan repayment. 

In contrast, investing in government Treasury bills and bonds is seen as safer: the government guarantees these securities, the interest rate is comparable to that of loans, and no CRR or SLR is required for these investments.

Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, told TBS, "Banks are recognising the potential decline in loan demand due to government spending cuts. As a result, interest rates on bills and bonds may continue to fall in the coming days." 

"Banks are looking to lock in their liquidity now, as loan demand has significantly decreased and alternative investment opportunities are limited," he added.

The seasoned banker also noted that if inflation decreases in the future, interest rates on bills and bonds are likely to drop further.